Thursday, August 13, 2009

The stock market's enthusiasm over the government's "cash for clunkers" program waned Thursday in the face of data suggesting consumers exchanged old cars for newer models at the expense of other retail spending.

Investors were taken aback by the Commerce Department's report that U.S. retail sales fell 0.1% in July, as opposed to expectations sales would gain 0.8%. Excluding autos, retail sales declined 0.6% versus an expected gain of 0.1%. Read full story.

"The decline in retail sales is quite startling to say the least," Dan Greenhaus, chief economic strategist, Miller Tabak & Co., wrote in an emailed note.

"The cash for clunkers program was expected to have had quite an effect on retail sales [but] motor vehicle and parts rose only 2.4%; expectations had looked for a gain more than double," he said. (more)

Let me summarize my market thoughts, as expressed on RealMoney Silver over the past two weeks.

As I see it, the bull market argument is that the U.S. is exiting the recession just like the many that preceded the current one. Consequently, corporate profits will exceed consensus forecasts in tandem with:

the resumption of revenue growth;

the record fiscal and monetary stimulation;

an export-led Asian recovery; and

the operating leverage associated with productivity gains achieved through draconian cost cuts and influenced by the benefits of wage deflation. (more)

Since the 1990s, the FED has change accounting rules so even the loose ~10% fractional reserve requirement could be thwarted. We live in an era of paper tickets.

In Part 1, Fractional Reserve Banking in Pictures, we saw how the banking system creates fraudulent money by creating new money on top of old. The reserve requirement limit used in the example, 10%, is the figure usually given, which means that from a $10 deposit the banking system could generate $90 of new money. Also, the FED uses Open Market Operations to create new money by writing a check upon itself.

This article will demonstrate that reserve requirements are effectively not in existence and easily avoided by accounting tricks in the U.S. banking system. In my view, the evidence is unrefutable as the sources are from the FED and documentation from Citigroup. Although I have tried my best to keep the following simple and source my data, please feel free to comment or question and I will do my best to reply. (more)

The US Federal Reserve said Wednesday the economy was showing signs of leveling out after 20 months of recession and it will extend the duration but not the size of a program to buy long-term government securities to minimize any disruptions from completing it.The U.S. central bank also kept its benchmark short-term interest rate steady near zero and said it would likely stay there for an extended period.

"To promote a smooth transition in markets as these purchases of Treasury securities are completed, the committee has decided to gradually slow the pace of these transactions and anticipates that the full amount will be purchased by the end of October," the Fed said in a statement at the conclusion of its policy-setting meeting. (more)

The economic position that the United States is now in is the result of a series of economic bubbles. To explain the nature of bubbles, I'm going to start by talking about their history; I'm not going to go all the way back to Tulip Mania and John Law, but I do want to mention some things from the Roaring Twenties that might sound familiar to us today.Over the eight-year period of that boom, the money supply increased by 62 percent. All kinds of new appliances and gadgets were sold: refrigerators, phonographs, electric irons, toasters, and vacuum cleaners. Many more cars were built — more than twice as many in 1929 than in 1919. More and more leisure activities became popular. More hotels were built, as were more roadside diners. There was an explosion of movie theaters, and of developments in Hollywood. Professional sports became a big business. Skyscrapers such as the Chrysler Building and the Empire State Building were started. There was a speculative boom in Florida real estate. The stock market boomed. Hoover promised a chicken in every pot. I don't know what Obama's going to promise — maybe pot in every kitchen. (more)

Home price declines in the U.S. accelerated in the second quarter, dropping by a record 15.6 percent from a year earlier, as foreclosures weighed on values.

The median price of an existing single-family home dropped to $174,100, the most in records dating to 1979, the National Association of Realtors said today. Total sales rose 3.8 percent to a seasonally adjusted annual rate of 4.76 million from the first quarter and fell 2.9 percent from 2008’s second quarter.

Prices fell in 129 out of 155 metropolitan areas from a year ago and 39 states experienced sales increases from the first quarter, the Chicago-based realtors group said. Sales in U.S. housing market at the heart of the global recession are beginning to stabilize, said Patrick Newport, an economist for Lexington, Massachusetts-based IHS Global Insight. (more)

Richard Bookstaber has worked at a number of hedge funds, running the FrontPoint Quantitative Fund, a market neutral long/short equity fund, and overseeing risk management at Ziff Brothers Investments and Moore Capital Management. At Ziff Brothers he also developed and managed the firm’s quantitative long/short equity portfolio.

Prior to joining Moore, Mr. Bookstaber was the Managing Director in charge of firm-wide risk management at Salomon Brothers. In this role he oversaw both the client and proprietary risk-taking activities of the firm, and served on that firm’s powerful Risk Management Committee. He remained in these positions at Salomon Smith Barney after the firm’s purchase by Traveler’s in 1997 and the merger that formed Citigroup. Be sure to visit his web site at: www.rick.bookstaber.com

He says he’s not sure how long the current bear market rally will last.

“But what I’m quite sure about is that the next wave down is going to be larger than what we've already experienced," Prechter says.

“I think we’ll definitely break the March 2009 lows, and I think the bear market will extend well into the next decade. … This is the top of the kind of degree that we haven’t seen for a couple hundred years.” (more)

Short sales have dropped to a six-month low in the stock market, but ironically enough, that may be a bearish sign for investors.

Short interest on the Standard & Poor’s 500 Index fell to 8.77 billion shares as of July 31. That represents a 12 percent decrease from two weeks before, according to data from U.S. exchanges and Bloomberg.

The tumble is the biggest since Sept. 30. Investors curbed their short sales of financial stocks the most, cutting them by 31 percent to 2.05 billion shares, Bloomberg reports.

The market has been on a torrid run since the S&P 500 hit a low of 667 March 6, rising 51 percent. (more)